Explaining PRC's Growing Impatience with MNCs

Traditionally, the activities of multinational corporations have been a focus of study in international political economy (see description), though this emphasis has dwindled somewhat in recent years with the notable exception of those like Peter Dicken who study global supply chains. Now, it's no big secret that foreign multinationals operating in China are complaining about the business climate there becoming more hostile to them than it was before. For instance, a recent European Union Chamber of Commerce in China report clamours for "further transparency" and complains about the "unpredictability of laws and regulations" as risks to future investments. "Discriminatory enforcement of laws and regulations" is also brought up together with backsliding on regulatory reform, inferior market access...the list of complaints goes on and on. So whiny they are.

How do we interpret these changes? Isn't China supposed to become more open and Western-like as development continues apace? Well, not quite. If you're a longtime IPE follower, I am sure you're familiar with Raymond Vernon's notion of the "obsolescing bargain" that he described back in 1971 with Sovereignty at Bay. In essence, while the potential investor has the upper hand when the host country is a largely unknown quantity, the balance of negotiating power shifts to the host country after a while since a lot of the known unknowns and unknown unknowns mentioned by a certain sage are figured out. If it's wise, tacit knowledge is often imbibed by the host country, making foreign expertise less and less valuable. With sunk costs as a given, it is no longer so easy for multinational corporations commonly portrayed as footloose and fancy-free to move around. Here is a short description of the "obsolescing bargain":

Before the investment is sunk, risk and uncertainty are high and the potential investor should be able to extract quite favorable terms to compensate for both. these terms are enhanced by the investor's quasi-monopolistic position. But as risk and uncertainty dissipate after the project proves successful and as other potential investors emerge to erode the quasi-monopolistic position, the host finds itself in a position to renegotiate the initial terms rather than paying the opening risk premium forever [to the multinational].

The dialectic in investor-host relations produced abundant evidence of the obsolescing bargain from the mid-1960s to the mid-1980s. Even in cases where no host ownership or nationalization took place, the typical time interval between negotiation and renegotiation of investment contracts shortened and the swing in tax rates alone grew by 30 to 40 percentage points.

It's certainly a researchable question if this phenomenon is at work in contemporary China. Its export infrastructure is widely recognized to be second to none, so it has very little to prove at this point in time. Contrast today's situation when they were still experimenting with special economic zones (SEZs) and had to ply foreign concerns with all sorts of incentives to set up shop in the coastal areas. Perhaps the tables have turned as per the obsolescing bargain; that's all. You've served your purpose, white man--now take it or leave it.